What Lies Ahead for IQOS

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PMI’s heat-not-burn IQOS has been a success in international markets.

In terms of their international markets, Philip Morris International (PMI) reported that IQOS is now in cities in some 38 countries and that its success outside the United States has been continuing apace. PMI’s Japan release for IQOS was a notable success and that was duplicated when IQOS was rolled out in Korea last year.

Even so, and while on deadline for this article, data from Asia indicates that IQOS sales have plateaued in Japan. CNBC recently reported that “Philip Morris International shares plummeted 16% in the company’s worst day since it spun off from Altria in 2008 after PMI posted mixed first-quarter results and said growth of IQOS, its heat-not-burn tobacco product, slowed in Japan.”

On an earnings call, PMI c.f.o. Martin King responded to the issue while referencing collateral materials (chart). “In general, these consumers are likely to display, at least initially, a slower pace in entering the RRP category,” King said. “That is, they are less likely to be in the innovators and early adopters groups. Instead, they are relatively overrepresented in the “late majority” and “laggard” groups, which are larger in size. This is common with any new product category, and especially RRPs, and IQOS in particular, given their phenomenal speed of growth in Japan. We are therefore adjusting our commercial plans in terms of the timing, intensity, and content of communication to specifically address the needs of these adult smokers. In parallel, we are strengthening our loyalty programs for existing IQOS users as competition intensifies.”

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PMI’s heat-not-burn IQOS has been a success in international markets

On the same call, PMI c.e.o. André Calantzopoulos stressed an optimistic view for IQOS. “Even if this temporary dynamic in Japan persists,” “we remain on track to double our worldwide in-market sales of heated tobacco units compared to 2017.”

Much of the data concerning these rollouts, including the regional scientific product testing for IQOS in various countries where the product has already been released, also informs the detailed marketing application that PMI has on review with FDA.

Reviewing an FDA advisory committee initial briefing on PMI’s application offers a glimpse to the value IQOS may have as an approved modified risk tobacco product once its initial marketing is approved. FDA is still reviewing the application to market and its process reveals a great deal of detail and objective analysis–yet so far the agency seems to have generally concurred with the application’s broad claim that PMI’s Modified Risk Tobacco Product (MRTP) Assessment Program “demonstrates IQOS meets the statutory standard for a marketing order” and that “the PMI scientific assessment program has demonstrated that IQOS will significantly reduce the harm and risk of tobacco-related disease for those smokers who switch from cigarette smoking to IQOS use.”

PMI’s market application to FDA goes into its own extensive description and detail. In summary, and it bears mentioning that any excerpt from these reports (from either FDA or PMI) should be regarded as a snapshot intended as an overview, not a full briefing, the company says that the “totality of the evidence discussed above and provided in the MRTP establishes (these conclusions):

• Clinical studies have shown that switching from cigarette smoking to IQOS leads to a significantly reduced exposure to HPHCs, which approaches the reductions in exposure that are seen with smoking abstinence

• Clinical studies have shown that switching from cigarette smoking to IQOS results in positive changes in clinical risk markers that are similar to those early changes that are seen following smoking cessation.”

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IQOS is key to PMI’s effort to work toward a smoke-free profile

While FDA focuses on the marketing application for IQOS, as well as other priorities like reducing nicotine levels in tobacco products in an effort to help adults quit, PMI is making headway toward raising the level of smoke-free products in its broad portfolio. The company is optimistic about reaching its minimum objectives in the next few years. While these goals are ambitious, at least one unverified report overheard in the industry suggested that PMI might be moving away from conventional cigarettes entirely by as early as 2025. However, Tobacco Asia reporting indicates that this estimate races ahead of the real schedule. PMI is working toward a smoke-free profile, but a more accurate projection would be that PMI seeks a minimum representation of more than 30% of total volume and upwards of 42% of total net revenue by 2025.

Clearly, IQOS is key to this effort and as PMI shifts its business away from conventional cigarettes and over to IQOS and other smoke-free products, the company’s progress is not measured strictly by product launches. PMI has been actively converting conventional cigarette factories to heat stick factories. PMI has already fully converted a conventional cigarette factory in Greece to one that now produces only heat sticks and plans to do the same for a Romanian factory, while also announcing plans to construct an all-new heat stick factory in Germany.

According to its established corporate structure, PMI will license IQOS in the United States in an arrangement with its American cousin, Altria. Basically, PMI has “entered into an agreement with Altria Client Service LLC (ALCS) by which ALCS and or its operating companies have a license to distribute and sell IQOS in the US. The ALCS operating company that will distribute and sell IQOS in the United States is Philip Morris USA (PM USA).”

As vigorous and challenging as the FDA approval process is, the process is clear and established. It is often more responsive than in other countries where manufacturers would acknowledge the need for a more appropriate regulatory structure, especially with regard to developing alternative products aimed at getting people to switch from cigarettes.

In some South American countries, e-cigarettes are not allowed. In Australia, the regulatory climate is different and tough…e-cigarettes are illegal and PMI could not sell a heat-not-burn product like IQOS. Even a vague regulatory structure can be confusing and non-conducive to business–in Canada, for instance, where e-cigarettes are widely available, no approval exists for e-liquids from Health Canada. In the US, getting products to the market is possible although the science must come before the marketing and FDA must review the application and make a decision as to whether it agrees.

The stakes are high and the market for IQOS, let alone its potential for harm reduction, could be huge, so to say that all eyes are on FDA is no understatement. The development of IQOS — and it is important to remember that heat-not-burn is not brand new science, but rather has become commercially viable now that certain battery and power issues have been resolved — follows the search for a true cigarette alternative that is perceived as both comparable and satisfying to consumers.

In terms of those consumers, the US presents a singular potential for IQOS, with its estimated 40 million smokers. At its investor day last November, Altria pointed to data from FDA’s Population Assessment of Tobacco and Health study that showed over half of adult smokers would consider using a tobacco product if it had a reduced harm claim. So, if there are 20 million or more smokers in a potential market for such an option, then the possibility of one day offering a “reduced risk” piece could prove to be a significant incentive. Already, according to PMI collateral materials, more than five million adult smokers globally have completely quit conventional cigarettes and have become exclusive IQOS users–and the company estimates another 10,000 smokers a day are making that switch. No surprise then that PMI anticipates good news and an approval to market IQOS in the United States. The hope is that IQOS will subsequently gain full modified risk tobacco product approval (also pending with FDA). With that in place, PMI believes it is positioned to respond to the sheer numbers of people looking to make the switch.

IQOS became an FDA priority in the past several months as a result of a major undertaking by PMI. In the company’s annual report, Calantzopoulos said, “Our reduced risk portfolio continues to provide us with the single-largest opportunity to accelerate our business growth and generously reward our shareholders, and we will make further significant investments in 2018 to drive this growth potential over the coming years….Momentum behind the harm-reduction principle is accelerating, helped by our vision for a smoke-free future. While the task is enormous, our resolve is steadfast, and we are confident that the outstanding people of PMI will rise to the challenge.”

Assuming IQOS is approved by FDA for the market, it is clear that PMI wants more than anything else to gain full MRTP certification from the agency. Indicative of this is the fact that in its application to FDA, PMI carefully stressed its intention to differentiate between smokers and non-smokers in its messaging during trials. An excerpt from the PMI summary reads: “Overall, adult smokers in the US appear to be genuinely interested in both trial and use of IQOS. Adult smokers and adult nonsmokers alike understood the proposed IQOS communications and product proposition. Overall, the PMI modified-risk messages and claims generated substantial Intention to Use IQOS among adult smokers, while not encouraging adult nonsmokers to try/use IQOS. This is an important criterion in establishing the utility of IQOS as a harm reduction product.”

For now, FDA’s approval order to market will send a positive signal to the US and to the rest of the world–that the agency has allowed IQOS for sale. The next step will be seeking the approval to sell IQOS as an MRTP, a reduced risk product, which will further enable PMI’s ability to put IQOS in front of other major markets.